Reasons_for_and_against_nationalization_and_privatization

Reasons_for_and_against_nationalization_and_privatization -...

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Reasons for nationalization Exploitation The original contracts held between an oil producing country and an oil company were unfair to the producing country. Contracts, which  could not be altered or ended in advance of the true end date, covered huge expanses of land and lasted for long durations.  Nationalistideas began once producing countries realized that the oil companies were exploiting them. The first country to act was Venezuela, which had the most favorable concession agreement. In 1943, the country increased the total  royaltiesand tax paid by the companies to 50% of their total profits. However, true equal profit sharingwas not accomplished until 1948.  Because oil companies were able to deduct the tax from their income tax, profits acquired by the oil companies did not change  significantly and, as a result, the oil companies did not have any major problems with the change imposed by Venezuela. Even with  increased oil prices, the companies still held a dominant position over Venezuela. Change in oil prices The posted price of oil was originally the determinant factor of the taxes that oil companies had to pay. This concept was beneficial to the  oil companies because they were the ones who controlled the posted prices. Companies could increase the actual price of oil without  changing the posted price, thus avoiding an increase in taxes paid to the producing country. Oil producing countries did not realize that  the companies were adjusting oil prices until the cost of oil dropped in the late fifties and companies started reducing posted prices very  frequently. The main reason for the reduction in oil prices was the change in the world’s energy situation after 1957 that led to  competition between energy sources. Efforts to find markets led to price cuts. Price cutting was first achieved by shaving profit margins,  but soon prices were reduced to levels far lower than posted prices as companies producing oil in the Middle East started to offer crude  to independent and state-owned refineries. Producing countries became aggravated when the companies would reduce the prices without warning. According to “The Significance  of Oil,” “small reductions in posted prices in 1958 and 1959 produced some indications of disapproval from certain Middle East governments,  but it was not until major cuts—of the order of 10 to 15 percent—were announced in 1960 that a storm broke over the heads of the  companies whose decisions would reduce the oil revenues of the countries by 5 to 7 ½ percent.”  High oil prices, on the other hand, raise the bargaining powerof oil-producing countries. As a result, some say that countries are more 
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This note was uploaded on 02/18/2012 for the course HISTORY hs101 taught by Professor Lynch during the Spring '12 term at Dublin City University.

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Reasons_for_and_against_nationalization_and_privatization -...

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